Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.13C h a i r m a n ’ s

7/ 29/ 2022

C o l u m n

Our Year in Review: Residential andSolar show strength
Our firm closes its fiscal year in May, so we are reviewing
our financials for the year. As you know much of ourbusiness is based on SPC administration of alternative
assets and analyzing the year’s data has revealed trends
into the private real estate market.
During this past year, even with Covid, residential
properties have seen tremendous growth. Although, it’soften said that residential and logistics facilities are “Covidtolerant”, we haven’t necessarily seen any year over year
growth for logistics. Meanwhile, residential investments
have been growing in popularity perhaps because they
have been reassessed for their added value as being
workplaces on top of being living quarters. Investment
amount per floor area have not dropped at all. Properties
along private subway lines which historically have not been
considered investment worthy are now picking up,
resulting in nearly 80 more investments among our clients.
Another area that has grown is alternative energy
investments. There’s continued demand particularly withinvestors in solar power generation which has tailwinds
coming in the way of SDG adoption and carbon neutrality.
As a result, funding for new projects and bulk purchases ofsmaller facilities are both growing in volume.

News stories are often about bids for big offshore wind
power projects like Akita, but there’s still many mega solar
generation being developed. Since we provide services likecashflow analysis, the number of solar has grown by nearly
40 such facilities this past year.
We had hopes that Covid would settle down and theweakened yen would usher in not only tourism again, butthat funding would pick up for hotel investments and otherproperties. Unfortunately, infections haven’t settled yet
and a back and forth continues. I believe there has to beboth an easement of border controls and face masks forthings to truly move forward.
(Kazuhiro Matsuzawa, Chairman)

Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.13R e n e w a b l e

7/ 29/ 2022

E n e r g y
and feasible areas to other regions. It also aims to expand
regional decarbonization efforts nationwide in 2030 andbeyond, achieve decarbonization in many regions before
2050, and transition to the next generation of resilientand dynamic local communities while solving many of thechallenges that exist.

Government support of theRegional Decarbonization Market

In each region, it is important to promote region-specificdecarbonization efforts in all fields such as industry, citizen
livelihood, transportation, and the public sector tocontribute to revitalization using local strengths. To
achieve this, the key is to the expand the implementationof renewable energy. Since most of the energy used inlocal regions depends on imported fossil fuels, it isexpected that the effective use of the renewable potentialof regional resources, while utilizing local employment andcapital, led by local companies and local governments, willlead to the improvement of local economies.

Leading up to the goal of carbon neutrality by 2050, bothpublic and private sectors of Japan are expected tocollaborate on policies that promote the decarbonization
market. Below, we have taken excerpts from the Regional
Decarbonization Roadmap of the Ministry of theEnvironment.
Regional decarbonization
From October 2020, our country declares to be carbon
neutral by 2050 (bringing down GHG emissions as a whole
down to zero). In April 2021, we declared to bring GHG
emissions down by 46% from 2013 to 2030. We aim tobring it down by 50% if possible during this time.
In order to achieve these goals, joint and co-creation
efforts between the national government and localities areessential. The "Regional Decarbonization Roadmap"(decided on June 9, 2021 by the National and Local
Decarbonization Implementation Council) was created withthe aim of realizing regional decarbonization that
contributes to regional revitalization and the enhancementof regional attractiveness and quality, with local regions
playing a leading role. The roadmap shows processes andconcrete measures, with a particular focus on initiatives
and measures to be implemented by 2030.

The "Regional Decarbonization Roadmap" states that allmeasures will primarily be executed over the next fiveyears to create a “decarbonization domino" in whichregional decarbonization spreads from highly motivatedLeading decarbonization regions
Leading decarbonization regions are regions that achieve
2050 net-zero CO2 emissions from electricity consumption
in the consumer sector (household, business and othersectors) and reductions in other GHG emissions, including
those in the transportation sector and heat usage, inaccordance with regional characteristics, in line with ourcountry's overall targets for 2030. These regions will serve
as models for an "implementation of decarbonization
domino".
The "Regional Decarbonization Roadmap" will be
implemented by FY 2030 in at least 100 leading
decarbonization areas, with active support from theMinistry of the Environment, the national government. It
will be led by local governments, local companies, andfinancial institutions, in accordance with the regional
characteristics, toward decarbonization, and will be begin
by FY 2025. Through this initiative, the plan is tosimultaneously resolve regional issues in diverse areas
such as rural villages, fishing villages, mountain villages,
outlying islands, and urban blocks, and to show thedirection for decarbonization efforts while improving(continues on next page)

Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.13R e n e w a b l e

7/ 29/ 2022

E n e r g y(continued) Assisting the Regional
Decarbonization Market

Establishing the Decarbonization Support Corporation

qualify of life for residents. The Ministry of theEnvironment plans to accept applications approximately
twice a year. First round results were announced on April
26, 2022, which received 79 applications from 102 local
governments, including joint proposals. 26 municipalities
were selected, including Maibara in Shiga prefecture,
Maniwa in Miyagi prefecture, Kitakyushu in Fukuoka
prefecture and Akita prefecture. In one of the selectedareas, a joint proposal with a private company will submit a
decarbonization plan for rural areas. The plan calls for theuse of 100% renewable energy in public facilities aroundtrain stations and in research labs maintained bycompanies. In one area, shared taxis will operate with EVs
derived from renewable energy, leading to a reduction in
CO2 emissions in the transportation sector.
The Minato Mirai district in Yokohama City, where many
commercial facilities and office buildings are located, wasalso selected as a leading decarbonization area. Including
Queens Square Yokohama, the district has 64 facilities and1,800 businesses and shops. They also want to coverelectricity used for air conditioning and lighting withrenewable energy. Although there are some challenges,
such as the need to procure electricity from renewablesources due to limited space for solar panels,
decarbonization efforts enhance the attractiveness of such
facilities.

Based on the Regional Decarbonization Roadmap, theMinistry of the Environment is preparing for theestablishment of the Japan Decarbonization Support
Corporation, which will provide funds for businesses. It
aims to alleviate the difficulties in securing funds due tolack of precedent or recognition for renewable energy
projects and to provide continuous and comprehensive
financial support for decarbonization projects by privatecompanies.
The goal is to realize a decarbonization market of 100
billion yen by using the stimulus of 20 billion yen forinvestments. In addition, through the creation of new
business models, the hope is that decarbonization
investments ultimately grow to several trillion yen throughthis initiative.
As we move toward 2050 carbon neutrality, it is expectedthat there will be more measures to support
decarbonization projects in which both the public andprivate sectors work together. We will keep you informedof developments in future newsletters.
(Kenichi Shimizu, Executive Manager)

Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.13J a p a n

R e a l7/ 29/ 2022

E s t a t e

A note about Private REITs
In recent years, with the Global Pension Investment Fund(established by the Japanese government) investing in 9
private REITs, the action seems to be picking up overall in
the private REIT market. Perhaps this is due to institutional
investors that have sought to reduce their risk in a market
that is sensitive to global affairs, and instead move into
more stable long-term investment management.
9 years after the start of the first J-REIT, private REITs in
Japan first began with Nomura Real Estate Private REIT in2010. Since then, the market has grown steadily to 42
investment corporations that hold total real estate of
4.725 trillion yen.
What are some differences between a private REIT and JREIT?
① Only “professionals” or qualified institutional investors
are able to make investments in a private REIT (differsfrom J-REIT and private funds that don’t require
professional investors)④ Since pricing is based on appraised values ofproperties, there is low correlation to traditional
assets such as stocks which are priced according to themarket (differs from J-REITs which have stronger
correlation to market share prices)
Also noteworthy is that private REITs are generally lower ininvestment amount, so for larger portfolios, J-REITs which
fund-raise on a larger scale through the market may be
more suitable.
For the distinctions made above, private REITs whichinvestment in alternatives are less affected by global
financial conditions and are expected to continue to be indemand by core institutional investors.
(Shigeru Hirai, Client Relations Group)② Much like a J-REIT, a private REIT not have a finite
investment period (differs from a private fund with afinite investment period)③ Low liquidity because it is not publicly listed. In orderto cash out, their holding must be transferred toanother private investor, or a request is made to sellback to the investment corporation (differs from JREIT shares which can be sold in the public market)

May 2022

J-REIT(a)Private REIT(b)(b)/(a)215,592

47,250

22%

4,481

1,257

28%

61

42

69%

3,534

1,12532%# of properties /# of investment co.'s

73

30

41%

Total property investment/# of properties (100M yen)

48

3878%

Total property investment（Acquisition cost、100M yen）
Number of properties
Number of investment corporations
Total property investment/# of investment co.'s (100M yen)(Source：Calculated by our firm based on ARES data)

Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.13

7/ 29/ 2022

S e c u r i t y t o k e no f f e r i n g

Challenges for the Real Estate STO
The secondary market is being developed as well, withOsaka Digital Exchange Co., the management company ofthe exchange announcing that it will begin operations in2023. The Japan Exchange Group also announced in its
interim business plan that has set a target develop a digital
securities platform for the secondary market that enables
trading of new products by the end of 2024. Also, notrelated to STOs but Osaka Digital Exchange Co. also began
operating a proprietary trading system as of June 27, 2022.

We continue with the current challenges of real estate
STOs, first discussed in volume 10.
Real estate STOs from the perspective of protection fromthird party claims for TK investment transfers have often
used Japanese Depository Receipts in their structures,however, there have been cases where GK-TK structures
were used for setup.
① The TK investment would be tokenized and listed on
Singapore’s digital securities platform ADDX, whereonly on this platform would the TK investment betransferred.
② When the investor transfers TK investment shares
over ADDX, they would first go through Tokai Tokyo
Securities.

③ In receiving issuer approval for TK investment
transfers, Tokai Tokyo Securities will create atransaction registry on ADDX which will be shared withthe issuer, thus implying that the issuer approval wasobtained based on the TK agreement. The transfer ofTK investment would be deemed valid once theregistry is shared with the issuer.

Once the secondary market comes to fruition, liquidity
should be higher which will allow individual investors topurchase easier. Trading prices should reflect the current
real estate values to a certain degree as well. However, if
trading volume gets closer to that of a J-REIT, the benefitsof a private REIT which was low volatility may be lost, andperhaps there will be less distinction from a J-REIT.
Additionally, if the security token (ST) is purchased onlywith cryptocurrency such as Ethereum, the tax implication
would be that the ST was exchanged for crypto and capitalgains would be recorded.
For the two points noted above, if higher volatility results
and capital gains tax are assessed, individual investors may
stay away from real estate STOs and invest in J-REITs
instead. It’s definitely worth paying close attention to how
the secondary market and tax regulations develop overtime.
※ As of June 2022, Aoyama Sogo Accounting Firm becamea supporting member of the Japan Security Token Offering
Association (https://jstoa.or.jp/)(Masanori Ikematsu, ASA Advisory)④ Protection will be secured against third party claims intransferring the TK investment when Tokai Tokyo
Securities creates an approval sheet with the set date(the day after the transfer becomes valid) that serves
as proof that the transfer was approved implicitly.
Copyright(c)2021 Aoyama Sogo Accounting Firm Co., Ltd. All rights reserved.

Aoyama Sogo Accounting Firm

Innovation Speed Quality

Vol.13J a p a nTa x

7/ 29/ 2022

U p d a t e

Revision of SME tax incentives forwage increases
With Japan’s 2022 tax reform, the tax credit available
under the “system for promoting wage increases” wasexpanded.
For small and medium-sized enterprises, there are nochanges to the requirement of a 1.5% overall wage
increase from the previous year to qualify for the 15%(limit applies) tax credit for corporate tax. However, thenew reform raises the maximum credit % to 25 to 40%
upon meeting certain additional requirements. (Applicablefor fiscal year starting April 1, 2022)
However, the maximum tax credit is limited to the amountof “Corporate tax (pre-tax credit) x 20%”.

We receive inquiries from companies that are performing
well and are considering wage increases and thecorresponding tax incentive. However, in practice, themaximum credit set at “Corporate tax (pre-tax credit) x20%” sometimes proves to be a difficult threshold to crossin maximizing the credit. For example, if wage is increased
by 5M yen and all additional conditions are met for the40% credit (2M yen), the company’s corporate tax (pre-taxcredit) amount and taxable income would have to be 10M
yen and 46M yen, respectively to fully use the allowablecredit.
It remains to be seen whether the expansion of the tax
incentive under the reform is truly beneficial for SMEs.
However, if any wage increases are planned, it is worth
looking into the potential tax credits that may be available.
(Sachie Aoki, Tax Group)<Reform outline for tax credits for SME(※1) wage increases>
Before Reform

After Reform(For FY beginning April 1, 2022 and after ※2)

Increase of 1.5% or more in total

Requirements

No change

employee wages compared to previousyear

Basis for credit %Increase in total employee wage amountNo changefrom previous year

【Maximum】

【25%】

【40%】

Basic

15%

15%

Increase of 2.5% or more in

Tax credit %Additional

Tax credit limit+10%

total wages from previous yr
and education and training req.

This period's corporate tax x 20%

+15%

+10%

2.5% or more increase fromPY total employee wages
10% or more increase from PY total
education and training expenses
No change※1 This new system is available for a portion of SMEs that file with a blue form. Only companies with less than 100M yen inpaid-in capital or contribution amount qualify (excludes companies that receive capital over a certain amount from large
corporations).
※2 Available for fiscal years that begin before March 31, 2024.

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